FHA loan debt ratios balancing act

FHA Loan Debt Ratios

In order to prevent homebuyers from getting into a home they cannot afford, FHA loan requirements and guidelines have been set in place requiring borrowers and/or their spouse to qualify according to set income to debt ratios. Using these ratios, lenders can calculate whether the borrower in question is financially ready to own a home. The two main ratios used are explained below.

1. Effective Income to Mortgage Payment Expense

  • Add the total mortgage payment (principal + interest, hazard insurance, escrow deposits for taxes, homeowners’ dues, mortgage premiums for insurance, and so on).
  • Then, divide that amount by the gross monthly income. The maximum ratio one can qualify at is 31%. See the example below:

Total amount of new house payment: $750

Borrower’s gross monthly income (including spouse, if married): $2,850

Divide total house payment by gross monthly income: $750/$2,850

Debt to income ratio: 26.32%

2. Total Fixed Payment to Effective Income

  • Add the total mortgage payment (principal + interest, hazard insurance, escrow deposits for taxes, homeowners’ dues, mortgage premiums for insurance, and so on) and any recurring monthly revolving and installment debt you might have (student loans, car loans, etc.; credit cards, and so on).
  • Then, divide that amount by the gross monthly income. The maximum in debt ratios one can qualify for an FHA loan is 43%. See the example below:

To read more about recurring monthly debt, click here.

Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income. The maximum in debt ratios to qualify for an FHA loan is 43%. See the following example:

New monthly house payment: $750

Monthly recurring debt: $400

Monthly debt: $1,150

Borrower’s gross monthly income (including spouse, if married): $2,850

Divide total monthly debt by gross monthly income: $1,150/$2,850

Debt to income ratio: 40.35%

FHA Loan Information

It’s important to be aware that the examples above do not determine exclusively whether a potential borrower will be able to qualify for an FHA loan. Other factors will still need to be taken into consideration, including the potential borrower’s credit history and whether or not they have a stable job. Contact David Jacobson – OakStar Bank for more information on FHA loans.